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June 30, 2011

In an unprecedented move in 2008, the 46-nation nuclear cartel, the Nuclear Suppliers Group (NSG), granted a crucial waiver to India enabling it to carry out nuclear commerce and ended 34 years of India’s isolation from the international mainstream in the wake of the 1974 nuclear tests. Describing it as a “historic deal,” Prime Minister Manmohan Singh called it “a recognition of India’s impeccable non-proliferation credentials and its status as a state with advanced nuclear technology”. The NSG exemption was a major step in the implementation of the US-India nuclear accord and since then Delhi has been working towards establishing a mutually beneficial partnership with friendly countries in an area important for both global energy security and climate change.

Last week, however, at its 2011 plenary meeting in the Netherlands, the NSG came up with new guidelines regarding tightening of exports of enrichment and reprocessing (ENR) technologies that seem to go against the spirit of its exemption to India. The transfer of ENR technologies will exclude nations that are not signatories to the NPT and do not have full-scope safeguards. Indian officials have already expressed their concerns, suggesting the new ENR rules would make the 2008 exemption to India rather meaningless.

The US State Department has tried to allay growing concerns in Delhi by suggesting that “nothing about the new ENR transfer restrictions agreed to by NSG members should be construed as detracting from the unique impact and importance of the US-India agreement or our commitment to full civil nuclear cooperation”. It goes on to argue that “the NSG’s NPT references, including those in the ENR guidelines, in no way detract from the exception granted to India by NSG members in 2008 and in no way reflect upon India’s non-proliferation record”.

But there is a growing disquiet in India. Some of it is rooted in genuine apprehensions about India’s ability to take part in global nuclear commerce in future, but a lot of it is ideological. Every setback is viewed as a triumph by those who have been against the nuclear deal on ideological grounds. The CPM has accused the government of “misleading” the people and Parliament even as the anti-US lobby is back with a bang, underscoring America’s perfidious behaviour in trying to scuttle Indian nuclear ambitions.

The fact remains that India enjoys a unique status in the global nuclear hierarchy and it was always going to be a difficult exercise in bringing India into the nuclear mainstream. It was the US that expended precious diplomatic capital in bringing the naysayers around when the exemption was granted in 2008.

The Obama administration’s support for the new ENR guidelines stems from its ideological commitment to the extant nuclear non-proliferation regime. Successive US administrations have viewed proliferations on WMDs as the biggest threat to US and global security; but unlike its predecessor the present dispensation in Washington believes the regime framework needs to be strengthened to counter the proliferation threat.

Meanwhile, India has been signalling that it doesn’t really need Washington to operationalise the nuclear deal and garner its benefits. This has been applauded by those who want a more independent (read anti-US) foreign policy. More applause followed when Parliament passed a nuclear liability law that makes it virtually impossible for US companies to operate in the Indian market. And now when the US is refusing to put its weight behind the NSG deliberations in favour of India, there is much heartburn about American duplicity.

Mired in domestic problems, the Indian government lost crucial time over the last three years when it could have settled this issue with some finality. Now, the never-ending chaos surrounding UPA 2 is raising doubts about the ability of this government to take decisive steps in the realm of foreign policy. With two non-serious governments in Delhi and Washington, is it any wonder that the gains of the landmark treaty are likely to be frittered away?

Delhi needs to engage its nuclear partners bilaterally now, seeking reassurances that they would stand by their earlier commitments. Nuclear commerce is not a one-way street. India remains a huge market and it should leverage its assets accordingly. While the new ENR guidelines are a setback, ground realities can be altered by astute diplomacy. After all, NSG guidelines are voluntary, so that its member states can have the flexibility necessary to deal with issues related to nuclear commerce. It is this flexibility that India should try to use to its advantage. Railing against American duplicity won’t help, identifying challenges and using diplomatic capital to overcome them is the way forward.

New Delhi : A study sponsored by the Union Home Ministry has recommended that Naxal sympathisers should be "left alone" to the confinement of seminar halls rather than persecuting them.

"Distinction needs to be made between Naxal activists and the cheerleaders, between incitement and advocacy and between criminal conspiracies and ideological sympathises. While the state can go all out against the Naxal overground activists, alleged persecution of the cheerleaders would provide no operational benefit.

"It would only endorse the Naxal description of the state as an intolerant oppressor. As long as the cheerleaders are confining their activities to the limits of the seminar halls, they should be left alone," the study conducted under the aegis of the Bureau of Police Research and Development (BPRD) said in its action plan for Left-wing extremism hit areas.

The findings of the study, conducted in Naxal affected states of Chhattisgarh, Jharkhand and Andhra Pradesh, have been submitted to top security establishment in the country including the Home Ministry and the National Security Advisor.

"A sensible policy to target the Naxalite bandwagon needs to be evolved. In recent times, Naxalites have been described to benefit from support they have managed to generate from key intellectuals in the society. While the state governments in the past have tried to muzzle the voices of these activities, such policies have not worked," the study said.

VISAKHAPATNAM: Sanskrit that is the mother of most Indian languages does not have any takers in the Andhra University. Not a single student has come forward to take admission in the post graduation course in Sanskrit this academic year. Thirteen applications for admission had been received in April second week for a total of 20 seats. But ultimately nobody joined the course.

The university authorities did not conduct the entrance examination in the first place as there were fewer applications than the seats that were to be filled up. So, they sought to admit the students directly. Four reluctant candidates appeared for the counselling but not one of them was willing to take admission in the PG course.

In the meanwhile, the admissions director of the university sent a missive to the faculty members concerned on the need to fill the vacant seats. "The four students who appeared for the first phase of counselling did not turn up for the second phase counselling. We were helpless," a senior official stated.

Sources said the four students were more inclined to join the Kendriya Samskrutika Vidyapeeth at Tirupati which offers free boarding facility. When contacted, AU registrar P Prasada Reddy said the university would go ahead even if there were 10 candidates ready to study the subject. "No one has come forward to take up the subject. What can we do if the students themselves are not evincing interest in studying the ancient language?" he asked.

Faced with this reality the university has decided to scrapthe PG Sanskrit course this year. "This is becoming common in many language subjects in several universities across the nation," the registrar claimed.

The Sanskrit department was set up way back in 1954 in AU. A scholar from Kerala started it. Many eminent professors and teachers worked in the department and 11 NRIs were awarded doctorates in Sanskrit from AU.

Ironically, as things stand today, even the department seems to have lost the glory. The Sanskrit department, which had a faculty of 10 members, now has only two- an associate professor and a teaching associate.

Now that the business has bounced off its lows of 2008 and 2009, it seems like the right time to ask that question. Looking at the strategic shifts that the biggest private equity (PE) firms have been making since early 2010, it’s clear that they are searching for an answer.

There is the shift in the way fund raising is being handled, especially at a time when many of the limited partners who invest in private equity firms have “maxed out” their PE allocations — and the few who haven’t are being courted by every major firm. There is the shift toward public ownership of the PE firms, led by Blackstone, KKR, and, most recently, Apollo Management. And there is the firms’ shift toward diversifying revenues away from their core business, the leveraged buyout (LBO), with many firms getting into credit investing, real estate, advisory services, proprietary trading, and other areas. (See Exhibit 1.) As Stephen Murray, the chief executive of CCMP Capital Advisors, put it, “The LBO business has become just another asset class for many firms.”

What’s more, private equity firms are going through this process of reinvention at a time when they’re facing plenty of other issues: bad press about fees, bad press about the practice of secondary buyouts (in which one PE firm sells a portfolio company to another PE firm rather than to investors via an initial public offering or to a corporation), turnover among limited partners, and the question of succession planning at the biggest firms (where at least some of the founders are getting on in years, and their peers are wondering how long they will stay in the game).

All these things are distractions, however. The real issue for private equity is whether — and how — the general partners who manage PE firms can revitalize the leveraged buyout.

The reality is that buyout returns are down — notwithstanding the occasional home run, like KKR and Bain Capital’s US$3.8 billion IPO of hospital operator HCA in March and the Carlyle Group and Goldman Sachs’s $2.9 billion IPO of Kinder Morgan in February. (See Exhibit 2.) For a long time, the top tier of LBO firms were returning in excess of 20 percent, but much of that was attributable to the exuberant public markets that prevailed in the 20 years leading up to 2008. Cheap debt helped too, allowing firms to do things like dividend recapitalizations (after which they were, essentially, playing with house money). Those days are gone, and PE executives don’t expect them to return soon, if ever. “You cannot just bet on interest returns and multiples going up,” says Gilbert Saada, an executive at Eurazeo, a mid-market private equity firm in Paris. “It doesn’t work anymore.”

Having been forced to write down the value of many of their portfolio companies in recent years, the general partners of private equity firms have taken steps to implement cost savings across those companies. In some cases they have used the same tactics that corporations use to drive down costs during a downturn, such as centralized sourcing and the replacement of people with technology.

These improvements, however, aren’t sufficient to salvage investments that may be deeply underwater. Nor are they enough to restore the LBO to its former position as a driver of superior returns. Instead, PE firms need to find a new approach to creating value, much as they did at previous stages of their evolution — such as in the 1980s, when private equity began to harness the power of financial engineering, and in the 1990s, when PE firms mastered the art of driving operational enhancement at their portfolio companies. Today, all the best firms are highly skilled at financial and operational value creation, and these are thus no longer ways to outperform one’s rivals. A third wave of innovation in private equity’s value creation model is needed, and we believe it will be “organic growth enhancement,” or the ability to systematically increase the top line of portfolio companies organically. This will require adding new capabilities at the PE firms themselves, rebalancing their engagement with portfolio companies toward organic growth, and making organic growth “net free” (meaning that it’s funded out of each portfolio company’s own current costs and investment, with no hit to the firm’s short-term earnings). (See Exhibit 3.)

Some experienced PE players have already reached similar conclusions about the need for organic growth. The kind of cost cutting that firms initiated in the aftermath of the 2008 crash, says Henry Silverman, chief operating officer of Apollo Management, “is great, but it’s not really an outcome-driver. It’s not even the icing on top of the cake; it’s the candles on top of the icing on top of the cake. The cake really is that you have to generate revenue growth — top-line growth — somehow.”

The math of organic growth may not be as instantly gratifying as the math of financial engineering, which boils down to, in Silverman’s words: “If I have 10 cents, borrow 90 cents, buy your tie for a dollar, and sell it to Joe for $1.05, I didn’t make a nickel; I made a 50 percent return on my investment.” It may not be as straightforward as removing head count and expenses to drive up EBITDA, with the automatic value increase that produces. The playbook for organic growth includes many more pages and is much more complicated. Still, the best private equity firms already recognize the importance of driving organic growth in their portfolio companies and are looking for ways to do it more systematically. This is a story about how they will get there.

Private equity’s new impetus for organic growth will ripple through not only the corporate sector but national and regional economies. Private equity has long been a pace setter in value creation, leading the corporate restructuring charge in the 1980s and the drive for operational efficiency in the 1990s. As the PE firms learn to enhance the organic growth of their portfolio businesses, managers at public companies — both those that may see an LBO in their future and those that will be competing with PE-owned companies — may need to rethink their own ability to spur the organic growth of their businesses. And from an economy-wide point of view, any rebalancing of capital-market incentives toward organic growth will change the economic landscape — and could help counter the concerns about “putting profits over growth and jobs” voiced by many observers of the business world in recent years.

The Third Innovation

The role that organic growth can play for private equity is perhaps best understood by looking back at how the buyout industry has evolved. Since private equity’s emergence as a high-profile asset class in the 1980s, the industry has profited from two major innovations. The first was financial engineering — specifically, using debt to buy companies and take them private, with the expectation of being able to resell them later at a leverage-enhanced rate of return. Some of the earliest private equity successes — including the 1982 acquisition of Gibson Greetings, a greeting card company, by onetime U.S. Treasury secretary William Simon — were examples of this. (Simon and his co-investors purchased Gibson Greetings from RCA in 1982 for $58 million in cash and the assumption of $22.6 million in liabilities, and sold it in a May 1983 IPO for $330 million.) Then there was KKR’s $30 billion+ acquisition of RJR Nabisco in 1989, the deal that really put PE on the map. “The people who understood the workout process made terrific profits,” says Paul Levy, who worked at Drexel Burnham Lambert in the 1980s, when it funded many hostile takeovers, and is now managing director of JLL Partners, a mid-market private equity firm.

By the 1990s, however, private equity firms were so well versed in the practice of financial engineering that the benefit was going primarily to sellers as increased competition among buyers — the private equity firms themselves — drove up bid prices. It was in that decade when private equity firms seized on a second big innovation: increasing the value of their portfolio companies through operational changes. The changes took many forms — process improvements, outsourcing, restructurings — but the goal typically could be summed up in three words: Take out cost. The results were impressive, and increasingly, public companies have begun their own improvement efforts by asking, “What changes would a PE firm drive?” This question puts them in the right frame of mind for taking aggressive action.

Although not all private equity firms may yet recognize the focus on organic growth as their industry’s third major innovation, some have already been moving in this direction. “A lot of the guys I know [in PE firms] have been thinking about the growth and the strategy” of their portfolio companies, says Steven Neil Kaplan, the Neubauer Family Professor of Entrepreneurship and Finance at the University of Chicago’s Booth School of Business, singling out TPG, KKR, and Bain Capital. “They are all trying to [address] it in different ways.”

TPG is a good example of a private equity firm that’s leading the way. Like many other firms, TPG looks to its portfolio companies’ top executives, whether those it has inherited or those it has installed, to drive organic growth. However, its 60-person operations team includes experts in the areas of pricing and sales-force effectiveness, two disciplines that can have a big impact on revenues. In addition, the many TPG operations personnel whose backgrounds are in “lean” — an approach to reducing costs that focuses on process improvements, using customer benefits as the compass — occasionally help TPG’s portfolio companies grow, albeit indirectly.

For instance, after TPG bought a piece of Motorola’s semiconductor business, its operating group consulted with the new chip company’s R&D function, in hopes of getting its engineers to improve the efficiency of the product development process. By the time the improvement program was finished, TPG’s portfolio company, ON Semiconductor, had greatly reduced the time it took to bring a new product from conception to market — from 500 days to fewer than 250. “The important thing was that we didn’t have to actually be technically strong in semiconductor design,” says Dick Boyce, the partner who heads TPG’s operating group. “We had to have very strong process capability, which we do in product development. You sort of have to pick your spots.”

Indeed, one big caveat attached to the idea that private equity firms need to find ways to spur organic growth is that spotting a growth opportunity usually requires an innate grasp of how a specific group of customers in a particular industry behave, and what those customers want. “You don’t understand how to create value unless you deeply understand an industry,” the University of Chicago’s Kaplan says. Most private equity firms do organize themselves by so-called industry verticals (health, consumer, retail, and technology are some common ones), but the expertise in those verticals is primarily for purposes of sourcing and making deals. If a firm has operating personnel, they are typically positioned as generalists — which makes sense since private equity firms can’t predict which of their industry sectors are going to need help in any given year and which (from the perspective of operating-group involvement) may be dormant. As TPG’s Boyce puts it, “We have to be able to flex people across various sectors.”

The critical question for private equity firms, therefore, is how they can get better at engineering organic growth within their portfolio companies without changing their firm’s structure and limiting their flexibility. The answer is that they will need to do three things: add new growth capabilities, rebalance the engagement with their portfolio companies in favor of growth, and find ways to make growth net free.

Adding Growth Capabilities

Of course, it’s always best, and simplest, if one has capable, growth-oriented executives running a portfolio company and the divisions within it — but this ideal isn’t always met, given private equity’s predilection for investing in companies that are underperforming and not fully realizing their potential. (Moreover, when target companies do have first-rate management, that fact is usually reflected in the buyout price.) Where the right people aren’t already running, say, product development or marketing, private equity may need to provide external support for those functions.

An infusion of organic growth capabilities can take several forms, and which one is best probably depends on the specifics of the private equity firm — including its size and the industries in which it operates. Only a handful of growth-enabling capabilities apply across portfolio companies. One is better pricing ability. Another is improved sales-force practices, since the direct sales forces of acquired companies often have faulty structures or incentives, or aren’t disciplined about getting rid of underperformers. “There’s almost always, in a company that has a direct sales force, a sales-force redesign — always some kind of broad commonality there,” says one private equity executive, declining to be identified because he doesn’t want to disparage the management teams with which he works.

Yet even with growth capabilities like these, many private equity firms don’t build them internally. “It’s unrealistic for a firm that is not enormous,” says Eddie Misrahi, chief executive of Apax Partners, a Paris-based private equity firm that focuses on mid-market companies in France. “The average PE firm is 10, 15, or 20 people, so it’s impossible.”

Bigger firms, such as TPG, have the option of handling these needs more directly. “When there is enough work to do that’s permanent, we hire it [in-house],” says TPG’s Boyce. “That’s the short answer.”

KKR’s experience with Dollar General, a chain of variety stores in which it invested in 2007, illustrates how a growth capability that resides within a private equity firm can sometimes bolster returns. From the beginning, only a small portion of the work that KKR’s operating group did with Dollar General — work related to forcing vendors into competitive bid situations — was cost-related. KKR’s other initiatives all had to do with increasing Dollar General’s revenue.

When KKR first acquired the chain, Dollar General’s management was basing its decisions about product assortments and which products to stock on the profit margins of individual SKUs — A.1. Steak Sauce, for instance. KKR believed it made more sense to look at dollars of margin per linear foot, a common measure in food retailing that takes into account not only how much profit a given product generates per dollar of sales, but how quickly the product sells. The application of the new metric was part of a broader analysis in which Dollar General — usually a place where customers go to pick up a few small items in between major shopping trips to Kroger or Walmart — sought to make sure it had the right products to maximize foot traffic. “We took the Nielsen data and said, ‘OK, what’s the $12 basket at a grocery store?’” says Dean Nelson, the head of KKR Capstone, the firm’s internal consulting group.

That question led Dollar General to start carrying milk and other basic products. It’s why the company — which had previously carried only Pepsi, as part of an exclusive supplier arrangement that allowed Dollar General to offer the beverage at rock-bottom prices — started offering Coke as well. “We lost a few margin points, but we put Coke on the shelf too,” Nelson says. “That’s driven a lot of extra baskets, a lot more visits.”

The category reevaluation, and other growth initiatives, such as the extension of Dollar General’s private-label brand, were driven by a KKR Capstone marketing specialist who spent the better part of two years working at the Goodlettsville, Tenn.–based company. Dollar General is now public and has an enterprise value of more than $12 billion, versus $7.3 billion at the time KKR helped take it private. “It has been a home run for us,” says Nelson. “And 80 percent of that was growth; it wasn’t getting better terms from P&G or Kraft.”

Rebalancing the Engagement

PE firms need to make organic growth the primary focus of their engagement with their portfolio companies, so that it’s not crowded out by attention to costs. One way to do this is to introduce the concept of headroom as a framework for thinking about the growth available in a market. Headroom is a simple concept: It is the market share that a company doesn’t have minus the market share it won’t get. This framework has the advantage of breaking down the growth challenge into two binary questions. First, there is the question about who the potential switchers are — the customers in the market that aren’t 100 percent loyal to a rival. Second, there is the question of what it would take to get these less-than-loyal customers to switch. These are the needs-offer gaps.

Headroom is particularly valuable as a tool for identifying organic growth opportunities in mature, highly competitive markets, which are the ones in which private equity firms’ portfolios companies often play. In many of these markets, there is no pixie dust that will triple or quadruple a portfolio company’s organic growth rate — but that may not be necessary. Some of these markets are so big that a two or three percentage-point increase in market share, courtesy of a headroom initiative, could mean a game changer in additional revenue growth. Coupled with an improved flow-through of profit, which most private equity–owned firms are adept at generating, such an improvement could make a big difference in the outcome of an investment. “If we had a company that had 2 percent to 3 percent growth, and we grew it to 5 percent, and then we managed the costs well, that might be enough to actually drive the business,” says KKR Capstone’s Nelson.

For many companies, the other valuable outcome of a headroom approach is that it exposes areas of activity that can’t produce growth (for example, activities aimed at customers who are too loyal to other providers). So it isn’t only the way a company’s best prospects light up as a result of a headroom analysis that is valuable: It’s also the way everything else gets grayed out.

At their best, headroom initiatives make companies much more coordinated. The companies’ strategic planners, customer research experts, sales staff, and product developers all know they must focus on the same things — the switchers and the needs-offer gaps.

Of course, headroom initiatives are only one example of how private equity firms can work with their portfolio companies to get them to think more explicitly about organic growth. Centerview Partners, for example, a private equity firm formed in 2006, relies on its focus and credibility to influence its management teams’ thinking and help those teams grow. Centerview invests in only a few companies at a time, all of them in consumer goods and services, and benefits from the clout that its trio of partners, including former Gillette chief executive James Kilts, have in that industry. It isn’t only the connections of Kilts and of Centerview’s other operating partner, Joseph Schena (a former VP at Nabisco and Kraft Foods), that help Centerview’s portfolio companies, such as Nielsen and Del Monte. It is also the partners’ extensive market experience and knowledge. “We are very focused on increasing our portfolio companies’ top lines, in part by helping them expand distribution and enter new channels,” says David Hooper, the partner who runs Centerview’s private equity business. Indeed, Hooper says, Centerview won’t invest if it senses the stakeholders with whom it will be partnering aren’t “open-minded to letting us help make a difference.”

Making Growth Net Free

Investing in organic growth often creates tension with the model of PE, which necessarily pushes general partners to be mindful of the debt they’ve taken on and the covenants they’ve signed. For this reason, it’s usually important that the funding for portfolio companies’ growth initiatives be net free, meaning the cash to invest must come from savings realized elsewhere within the portfolio company or from an “organic growth investment charge” that’s taken when the buyout is made. (See “A Different Way of Funding Organic Growth.”)

Headroom can help with this, too. At the very least — even with private equity owners that aren’t willing to increase the cash they’ve committed — a focus on headroom can make companies smarter about the organic growth initiatives they have in place. Take product development: A company looking to increase its market share would make sure that its product development efforts were aimed at customers that were likely to switch, and were built around needs-offer gaps that really needed to be closed. Or sales-force redesign: Although it wouldn’t necessarily spend more on its sales force, a headroom-conscious company would make sure that its salespeople were going after prospects that might actually switch.

Headroom can also help companies identify which costs they can cut in non-promising areas in order to reallocate them somewhere else. Here, the concept of “return on effort” is important.

Reinforcing PE’s Baseline Capabilities

Even as organic growth becomes a more explicit part of the private equity compact, the means of value creation that existed previously will remain important. Private equity firms will have to be best in class at financial and operational engineering; the organic growth imperative doesn’t change those requirements. It is, rather, a new way of gaining competitive advantage in an era when many private equity firms are still trying to utilize tactics that have become commoditized.

Indeed, part of the promise of organic growth enhancement, as a PE innovation, is the impact it will have on the two capabilities that most general partners would say are as important as adding value to their portfolio investments — fund raising and deal making.

Despite a few recent improvements, the fund-raising environment has deteriorated, and will likely remain depressed for the foreseeable future. There are several reasons for this. One is that limited partners of every kind have seen their non–private equity investments, including real estate, tank in the last few years, says one general partner. As a result, this partner says, “the denominator has gotten smaller.” U.S. state pension funds in particular — traditionally among the biggest backers of private equity — are facing “huge shortfalls in funding versus liabilities,” he adds.

The reduced pool of available capital is forcing senior managers of many private equity firms — including the firms’ boldface names — to spend more and more of their time on the road meeting with accounts and prospects. “Basically, you’re out there selling the brand,” says Apollo’s Silverman. “That’s a different step from traditional fund raising, which is actually asking for the order. The point is to make sure when you ask for the order — when you say, ‘We’ve got this great deal; why don’t you put up $400 million?’ — that it’s the 16th meeting, not the first.”

In the future, having demonstrable organic growth capabilities will be part of what general partners sell, and something that reinforces their fund-raising ability.

Likewise, having a successful approach to engineering organic growth will give firms an advantage in deal making. Just as private equity firms that were one step ahead in financial engineering in the 1980s or ahead in operational engineering in the late 1990s were able to pay more for available assets and still earn rich returns for their limited partners, so will the firms that master organic growth enhancement today succeed at winning more deals. That will cause the money to flow their way, bringing them more fee revenue and more opportunities for capital gains.

The bottom line is that without a strategy for expanding organic, top-line growth at their portfolio companies, private equity firms will become less competitive at raising investor funds and making deals. “You’d better have a strategy,” says Misrahi of Apax, “or else you’re a me-too product. And if you’re a me-too product, in the next five years, you’re nowhere.” CCMP’s Murray offers an even more fundamental perspective: “Most of the industry doesn’t recognize the problem. The private equity business has always been about providing a solution for a company’s orphans or an entrepreneur’s needs; we make professional businesses more entrepreneurial and entrepreneurial businesses more professional. We need to go back to being in the solutions business and not just another asset class for investors.”

By embracing private equity’s third innovation of enhancing organic growth — adding new growth capabilities, changing the dialogue with portfolio companies, and making organic growth net free — the most innovative PE firms will enrich their “solutions business,” and gain market share and improve their overall profitability in the process. As they succeed, they will ensure that their core business continues to be a vital force in the capital markets, and at the same time will help promote a more productive, growth-oriented perspective throughout the corporate sector.

MIGHT THE CONTRACT CHANGE?

In a world where private equity returns will depend to a greater extent on portfolio companies’ ability to grow organically, there may be an argument for lengthening the life of certain funds. The typical seven- to 10-year cycle of fund raising, acquisition, and exit may not make sense with investments that are generating good returns. After all, engineering organic growth can take more time to show results than financial and operational engineering; it may be that after five years in the portfolio, the portfolio company is at the very beginning of what may be a decades-long rise in revenue and profits.

When that is the case, “Why rush to get out?” asks Paul Levy, managing director of JLL Partners, speaking of both the private equity firms and their limited partners. The power of compounding, Levy points out, really kicks in during the “out” years. Twelve percent for five years — no argument; that’s nice. Twelve percent for 30 years — that starts to be real money, Levy says.

Of course, most of the limited partners with whom Levy has broached the topic want to know what would happen, under these circumstances, to the fees they pay. A private equity firm may initially create a lot of value by identifying promising investments, improving company operations, and setting the company (per the philosophy of this article) on more successful organic growth trajectories. Eventually, though, the private equity firm’s contributions should be mostly complete. At that point, from the limited partners’ perspective, shouldn’t the fee structure change?

“Maybe you do something whereby instead of 80–20, after a certain point in time, it becomes I own 20, you own 80, and you can do what you want with your 80,” Levy says, describing the conversations he has had on the topic with limited partners.

Theoretically, lengthening private equity holding periods might also address some of the more contentious issues surrounding secondary buyouts, in which one private equity firm sells a portfolio company to another private equity firm, in order to close the fund and return money to its limited partners at the agreed-upon time.

With the IPO market largely closed off in 2009 and 2010, “secondaries” — an escape hatch for private equity firms looking to exit their investments — became common. Problems arise, however, when a limited partner ends up owning the same company as before, but through a different private equity firm — and having paid transaction fees coming and going. “That really creates tensions,” notes Eddie Misrahi, the managing partner of Apax Partners.

Yet changing the contract may be an idea whose time has not yet come. Private equity executives say most of their limited partners aren’t looking to rearrange things so that a portion of the capital they commit is “permanent.” On the contrary, says one private equity executive, limited partners “are always pushing to get out of investments, to get their money back.

The myth of a clean waiver from NSG has been finally busted with the group tightening its guidelines

During the more than three-year-long process to finalize the terms of the nuclear deal with the US, Prime Minister Manmohan Singh kept meretriciously reassuring the nation that he would operationalize the deal only after securing a broad political consensus in support. He even pledged: “Once the process is over, I will bring it before Parliament and abide by the House.”

Yet, he completely bypassed Parliament. And instead of any attempt at consensus building, the country witnessed a polarizing single-mindedness to clinch the deal at any cost.

Now, with several of Singh’s key assurances to the nation falling by the wayside, the nuclear chickens have come home to roost. The Nuclear Suppliers Group’s (NSG’s) new ban on enrichment and reprocessing (ENR) equipment transfers fulfils one of the last remaining conditions of US’ Hyde Act, highlighting the rising costs for India of a deal whose much-trumpeted benefits are likely to remain elusive. India also has ended up without a legally binding fuel supply guarantee, despite its bitter experience over the US-built Tarapur plant. And it has secured no right to take corrective measures even if the US again unilaterally terminates cooperation, as did in the 1970s.

That NSG granted India a clean, unrestricted waiver in 2008 is a myth the politically besieged Singh government created to save face in public. In truth, it had signalled to the US earlier that it could live with a conditional waiver as long as the conditions were not embarrassingly conspicuous. Indian diplomacy sought to ensure that prohibitions on nuclear testing and ENR transfers remained implicit, or else Singh would stand exposed at home.

In this light, NSG, amid a tussle between non-proliferation purists and pragmatists in its ranks, arrived at a waiver whose language was politically palatable to New Delhi, but whose basic terms meshed with the stipulations in the Hyde Act and some of the purists’ demands. The waiver text incorporated several layers of riders— some explicit and some implicit.

While the bar on Indian nuclear testing was imposed by linking it to the NSG Guidelines’ paragraph 16, which deals with the consequences of “an explosion of a nuclear device”, the prohibition on “transfers of sensitive exports” was fashioned by specifying that such transfers will “remain subject to paragraphs 6 and 7 of Guidelines.” Paragraphs 6 and 7 incorporate a presumption of denial of sensitive items. This linkage to the two paragraphs was devised as an interim step until NSG formalized a ban on ENR and other sensitive sales.

Now, last week’s formal ban— which, in effect, singles out India —meshes with the Hyde Act’s bar on the transfer of ENR and heavy-water equipment to India, other than for a multinational or US-supervised facility. It also blends both with the Hyde Act’s call for an NSG-wide ban and with the US-India 123 Agreement, which excludes ENR and heavy water equipment transfers by saying they “will be subject to the Parties’ respective applicable laws, regulations and license policies”. Even the Indo-French and Indo-Russian civil nuclear agreements do not include ENR and other sensitive transfers in their scope of cooperation.

India, which committed itself to support NSG moves to halt the spread of ENR technologies “to states that do not have them”, has itself become an NSG target. It will, moreover, have to build a costly new internationally safeguarded reprocessing facility without getting the smallest component for it from overseas.

The NSG ban highlights, another fundamental reality, about India that is also embedded in the Hyde Act, the 123 Agreement and the Safeguards Agreement: Apart from retaining nuclear facilities in the military realm, India is being treated, for all intents and purposes, as a non-nuclear-weapons state and thus subject to the non-proliferation conditions applicable to such states, but with its non-membership in the Non-Proliferation Treaty carrying continuing penalties. But the ban’s real effect is to expose New Delhi’s charade that it secured a clean, unconditional NSG waiver. Disturbingly, the government expended greater efforts to pull the wool over the Indian public’s eyes than to stick to Singh’s assurances to the nation.

Consider another telling fact: Though the deal was ratified by the US Congress on 1 October 2008, Singh has yet to make even a statement in Parliament on how its final terms square with his 17 August 2006 assurances to the nation. What can he tell Parliament when the US Congress has removed his government’s last possible fig leaf?

Through the ratification legislation—the US-India Nuclear Cooperation Approval and Non-Proliferation Enhancement Act (NCANEA)—Congress actually busted several myths peddled by New Delhi. First, NCANEA makes explicit that, “Nothing in the [123] Agreement shall be construed to supersede the legal requirements of the Henry J. Hyde Act.” Second, NCANEA stipulates that the US promise of uninterrupted fuel supply is a “political”, not legal, commitment. It cannot be anything else because the 123 Agreement itself confers an open-ended right on the US to suspend or terminate cooperation. And third, the final deal grants the US specific rights, but spells out only Indian obligations.

More fundamentally, the deal has come to symbolize the travails of the Singh government—scandals, broken promises, malfeasance, poor public accountability, and the resort to casuistry to camouflage reality. The cash-for-votes scandal in Parliament set the stage for the other scams that have followed.

Brahma Chellaney is professor of strategic studies at the Centre for Policy Research in New Delhi.

The so called Arab spring represents a massive popular movement, not seen or predicted in the Arab world ever since the Suez sponsored Nasserite upheaval. It is as significant as the falling of the Berlin wall. The effects of the falling of the Berlin wall are still being felt. Similarly, the Arab spring will lead to irreversible and continuous changes.

Although a common thread links the movement in all the regions its origins are not monocausal. The common denominator is that the entire region seeks a total transformation of ruling political structures and processes, fundamental reforms in governance to foster social equity and emancipation of the poverty ridden classes. The downtrodden have risen to forge a new identity, to look for better opportunities in education, development and personal enhancement.

The spring started in Tunisia with a policewoman slapping a young adult who immolated himself later. This ignited into a blaze the widespread discontent which had been there in Tunisia against the regime, leading ultimately to the flight of the president of Tunisia. Reactions followed in Egypt, Yemen, Bahrain, Libya and Syria where similar undercurrents of discontent prevailed against the autocratic regimes. The Egyptian president had to abdicate also. The Yemen President, hurt in an assault at the Presidential Palace, took refuge in Saudi Arabia. Other rulers are facing armed insurrections.

The specific issues vary from country to country but broadly they can be placed in two categories. The movements in Tunisia, Bahrain and Libya are more social than political or economic, engineered by unhappy tribal or sectarian maladjustments, aggravated by authoritarian rulers. In Egypt, Yemen and Syria the roots lie in political, economic and sectarian dissatisfactions. Only Bahrain is monarchial: the rest of the five countries are republican. Great anxieties are being felt in their neighbourhood, especially the monarchies in Saudi Arabia, Jordan and the gulf region. If the unrest spreads to these regions, absolutely unpredictable consequences can arise. Instability in Saudi Arabia will lead to severe repercussions in the oil and energy politics of the world. There are many who dread at the thought of instability in Saudi Arabia as it is also the custodian of the Muslim holy places of Mecca and Medina.

In Egypt the problem also has an inter religious dimension. The Copts and the Muslim citizens have never been able to live in total harmony all these decades past. In Bahrain and Syria the rulers are from minority communities, Sunni and Shia respectively and the Shia Sunni divide has now come to the fore as never before in these two countries. The sectarian conflict is also being provoked from outside, Saudi Arabia in the case of Bahrain and Iran in the case of Syria. Iran is also supporting the majority populace of Bahrain. The Sunni cause has received support from the Saudis who are forever striving to establish the supremacy of Sunni Islam over the entire Islamic world through liberal funding and projecting Wahabism and Salafism. In Libya, the problems arise from a society, divided heavily between the tribes, clans and regions, each imbued with its own sense of sub nationalism. The Libyan unrest is compounded further by a Western interference, operating under a new aggressive principle of defending the indigenous population against the so called depredations of its own regime This is too thin a cover to disguise the Western Powers’ real objectives in Libya, originating from their desire to control the economic and oil resources of Libya. The West is otherwise also reluctant to lose its preeminence in the Arab world, particularly Egypt and Yemen. The interests of the West and Saudi Arabia in this respect coalesce. These developments point to two geopolitical factors at play in the region, rising Shia Sunni rivalries and the open Western intervention in the region, to safeguard their energy security.

Aggravation of Shia Sunni divide will cause unbridled manifestation of competitive religious chauvinism, as is already happening in Pakistan, and as had become common, though largely one-sided, during the Taliban rule in Afghanistan. Several Arab countries have significant Shia populations like Kuwait (30%) and Saudi Arabia (17% mostly in oil locations), not to mention Iraq which has a majority. As Shia Sunni antagonism crosses the point of no return these countries could get severely troubled.

The West, to protect its concerns regarding hydrocarbons, has already co-opted the UN to justify armed attacks in Libya. It has also set in motion the reconstitution of the Gulf Cooperation Council (GCC), primarily of Arab Sheikhs and monarchs, but now to include also the kings of Jordan and Morocco. The GCC will be expected to provide counterweight to the republican Arab regimes if they emerge as hostile entities.

Some broad contours of the likely shape of events in the affected regions can be made out but the distant future remains very hazy. In Egypt while a general consensus to have a new constitution has evolved, the debate remains unsettled what should come first, elections or constitution. A significant development in Egypt has been the recognition of the Muslim brotherhood as a political party, which entitles it to participate in elections overtly using its own agenda as its manifesto. The Muslim brotherhood had for a long time tried to seek recognition and acceptability in the country but had not succeeded so far. Although it has indicated now that its participation in the elections and in the governance thereafter if elected to power, will be bereft of any overtones of violence, it cannot be taken for certain that its strategy will not change in the future, like the Maoists in Nepal who joined the civil processes in Nepal giving up their violent ideology but have retained the desire to become ultimately the supreme power in Nepal. The Muslim brotherhood in Egypt always had the aim of establishing a complete sway over the country and, thereafter, to spread the tentacles of its ideology to other regions of the Arab world. The Muslim brotherhood had been founded in the vision that all Arabs would unite to form one single Islamic Umma but that dream was not fulfilled because the Arabs felt that they were Arabs first and Muslims later. Will this dream reappear in case the Muslim Brotherhood gains power in Egypt remains to be seen but the possibility that some kind of pan Islamist ideology will get promoted in the Arab world under its tutelage will be on the cards.

In Yemen, after the President ran away to Saudi Arabia, a serious tribal conflict has ensued. Yemen is a major strong hold of Al Qaeda in the Arab world and therefore the Saudis and West are deeply interested there to liquidate it. In Bahrain Saudi troops have helped the ruler to crush the Shia opposition for the time being but the discontent rages. Possibly, in Libya, Muammer Qaddafi will have to leave the country in which case how the equation of governance will be resolved with acute differences existing among its tribes, clans and regions will be a time consuming affair. The West would like a pro West government to be established in Libya but the Arabs of Libya are also highly anti US and they do not necessarily consider pro Western government to be in their best interest.

In Syria issues are equally complex. The Syrian president controls all the levers of military power with members of his Alawite sect in all key positions. The Sunni majority, unable to construct a serious alternative, may decide to accept the continuing leadership of President Bashir, albeit reluctantly, till better scenarios surface. Sooner or later, however, the strength of the majority will be felt in the ruling corridors of Syria more and more emphatically and the status quo will change. Syria is the last bastion of Bath socialist philosophy and ideology and if Bashir is thrown out that will mark the end of the last secular establishment in the Arab world.

Who are the real shakers and movers in the Arab world? They are largely the young generations familiar with the internet, face book and twitter and, thanks to them, cognizant of the happenings all over the world in terms of enlarging peoples’ rights, economic renaissance and upward mobility. They are better educated than previous generations but they lack adequate avenues of employment and personal development. Their education and awareness heightens their sensibilities, strengthens their aspirations for better living standards and raises their demands for liberty, equity, justice and fair play in their societies. Their desperation was acute and any spark anywhere had the potential for their frustrations to explode. The Tunisian episode became the trigger and they have seized the opportunity to seek new spaces for themselves.

Will the new structures of governments which may get established be able to fulfill the aspirations of this growing community of young people and, if they do not, what will be the consequences? Their energies will then stretch into areas which will militate against a harmonious existence and relationship between the governed and the governing.

In such a milieu an ideology like Muslim brotherhood gets a new opportunity to stake a new role and play it out more successfully than what it was able to achieve in the past.

Egypt is the largest Arab country and can be expected to be in a leadership role in the region. A Muslim Brotherhood government in Cairo may act as a magnet for the Islamists in the entire region. Since Islam remains inhospitable to democracy, in due course Islam will rise to preeminence in all the countries. Sooner or later this will result in the clergy assuming more importance and weightage in the administration as happened in Pakistan. The process can develop into a sturdy slide towards Islamization of the Arab world and later into an Islamist configuration as a more myopic view of Islam gets generated elsewhere in the world.

The grounds for such a configuration worldwide are fairly strong. In many regions irrespective of the nature of regimes, where Muslims feel victimized, Muslims are always pushing towards Islamization. In Muslim countries, the thrust towards Islamization invariably spawns a drift towards Islamism. In certain countries in Western Europe and also in the United States, the writings on the wall have been deciphered. They are forsaking the values of multiculturalism, which grew out of Renaissance, and Reawakening in some previous centuries in Europe and which had become articles of faith in the conscience of the Western people. Threats of terrorism, fear of Muslim immigrants overtaking and outnumbering the natural residents, and the rigidity of Islamic practices and doctrines which lead to unbridgeable gaps with other religions, have compelled several European countries to turn their face away from multiculturalism. An outline of a dreadful scenario could be in the offing, foreseen more than 15 years ago by a Harvard professor, Samuel Huntington, who had created a lively controversy then by enunciating what he called a theory of Clashes of Civilizations. Discarding multiculturalism is tantamount to hardening one’s own cultural posture. Set against the Muslim desire to live by their own religious and cultural standards, the space for compromise in these countries narrows down. Under these circumstances can a clash in a higher profile be ruled out altogether in the future? In the US this dilemma is not being articulated in the public domain yet because their constitution recognizes the supremacy of the rights of the individual over the rights of the State. There are many Muslims in America who are born Americans and, therefore, enjoy the same rights as the rest of the population. Publicly, the administration there cannot ask the Muslim Americans to live by the values of the majority. There the conflict is sought to be controlled covertly in the sense that laws have been amended or enacted, like the Patriot Act, to give the enforcement agencies more powers to keep under aggressive surveillance any citizen suspected of transgressing the laws of the country or acting suspiciously.. This private posture of the US government cannot remain hidden for too long and the battle will be out in the open as in Germany, France and Australia. Muslims are averse to any reforms in their religious and ideological doctrines. In the “new” Arab world already burdened with anti US and anti west images, the reactions are bound to be mirror opposites. The growing influence of Al Qaeda ideology will ensure such a result.

Some conclusions which can be immediately drawn from the unfolding events in the Arab world are as follows:-

(a)The area will remain destabilized over an extended period.

(b)There will be long disputes over new political structures and methods of governance. Democracy’s chances appear slim.

(c)Polity will get polarized with religious conservatism gaining an upper hand.

(d)As Al Qaeda has made significant in roads and anti US and anti West sentiments predominate, a slide towards Islamism seems unavoidable in the long run.

(e)The dominant strand of such an Islamism will be Sunni. Shia Sunni chasm will widen.

(f)Resultantly, religious extremism will grow which in turn will fuel radicalization and Jehadism.

(g)At the wider international level Arab countries of the region may constitute themselves into a bloc against the western world.

(h)Energy will become more expensive.

India will need to keep an eagle’s eye on the developing scenarios in the Arab world. While its own energy security will perhaps remain the prime concern, it will also need to insulate itself against the influences of a possibly growing Islamic resurgence in West Asia and North Africa.

The competition for the 126 medium multirole combat aircraft deal has sprung a surprise. The two American aircraft, the F-16 and the F-18, have been eliminated after technical evaluation by the Indian air force, belying the expectations of the government of the United States of America, American companies and most Indian analysts.

American officials and specialists on India had built up anticipation that a US aircraft would eventually win the contract. In their view, this would be tangibly rewarding the US for the nuclear deal and the nuclear suppliers group exception permitting international cooperation in India’s civilian nuclear sector. Indeed, it was seen as a legitimate ‘deliverable’ for steps the US took to end our nuclear isolation, more so as our nuclear liability legislation has put on hold prospects for Indo-US civilian nuclear cooperation.

American analysts saw it also as a concrete demonstration of India’s readiness to give substance to its strategic partnership with the US. Quite obviously, defence cooperation has to be an integral part of any serious strategic partnership between countries. Even before the consummation of the nuclear deal, military exercises between the two countries featured prominently in bilateral ties. Over 50 such exercises, increasingly elaborate and covering all three services, have been held in the last seven years, providing exposure to each others’ operational practices. Third country participation has extended their regional scope. The most recent exercise off Okinawa involved the Indian, American and Japanese navies. The strategic import of such exercises is apparent.

Our readiness to buy US arms on a significant scale post the nuclear deal indicates developing confidence in longer term US strategic intentions towards India. The first tentative step in this direction was actually taken prior to the nuclear deal, in the context of the National Democratic Alliance regime’s declared willingness to expand ties between “natural allies”. A number of weapons locating radars were ordered from the US. The US has possibly obtained in the last few years larger actual orders for equipment compared to other sources. These have included, apart from the Trenton, six C-130J transport aircraft, eight P-8 maritime reconnaissance aircraft and a number of VVIP planes equipped with advanced electronic warfare suites. The government has approved most recently the acquisition of ten C-17 heavy lift transport aircraft for a hefty $4.1 billion. The US is, by all accounts, well placed to bag the sizable order for a supply of attack helicopters and potentially of light howitzers as well.

It is in this background of growing acquisitions from the US and the United Progressive Alliance government’s reputed pro-US leanings that it was expected India would go American for the massive $10 billion MMRCA deal. Indeed, the eventual value of the deal will be far greater if supply of services and spare parts and inevitable upgrades are taken into account over the 40-year service life of the aircraft. Given the developing India-US strategic ties, the acknowledgment that the US possesses the world’s most advanced military technologies, the field efforts put in by Boeing and Lockheed Martin to secure the deal by way of lavish promises of technology transfers and tying up with big private-sector Indian companies for offsets and so on, and the much lower cost of the US planes compared to the other contenders, the question was whether a contract of such proportions could conceivably be denied to the Americans? The worst case scenario supposed a division of the contract between the Americans and the Europeans, following the civilian aircraft pattern with orders divided between Boeing and Airbus, although professional circles considered such an option most unsound. No one imagined, as has happened, that the Americans would lose the race , effectively, after the first heat.

That the US chose to immediately express its disappointment officially at this setback underlined how political the MMRCA deal had become, and also the excessive nature of US assumptions. The Indian defence acquisition process has been long plagued by political wheeling-dealing, charges of corruption, lack of transparency, delays and so on. The government has tried to steer the high-visibility MMRCA contract away from such shoals. If politics were to dictate awarding the contract to a US company, then where was the need for international tendering? The acquisition could have been directly negotiated with the US government through the foreign military sales route. The political argument is double-edged — political considerations could equally have weighed in Europe’s favour, given outstanding concerns about the reliability of the US as a supplier in a conflict situation. No contending party can ask that politics should not vitiate decision-making and yet put forward its own superior political claims for a favourable decision.

If, in the case of the US, the positive trends in the overall relationship are driving defence ties in the right direction, the negatives in the relationship have not yet been wrinkled out. It is not merely the remaining Cold Warriors on both sides at policy level, as the US defence secretary, Robert Gates, believes, that are impediments. On defence procurement, the US insists on legal arrangements that infringe upon the recipient country’s sovereignty, which is why some key framework agreements that the US seeks to enable supply of advanced technologies remain pending. If the US continues to arm a military-dominated Pakistan, if its tolerance levels of Pakistan’s official complicity with terrorist groups that target its own interests as well as India’s are inexplicably high, if its policy in Afghanistan disregards vital Indian interests as a country central to this region, if it chooses not to focus politically on Pakistan’s expanding nuclear programme with Chinese assistance, it has little to do with Cold War attitudes.

The judgment that the US makes of what is best for its interests in the current situation weighs against substantive Indian interests. On global political, economic and environmental issues that have emerged in the post-Cold War period, Indian and US positions remain apart in many respects, as the objective requirements and goals of the two countries are not alike. The US preference is to integrate India into the present global system set up and dominated by the US, or make India its collaborator in bringing about inevitable changes. India would want to be on the right side of the US as much as possible, but will be compelled to be on its wrong side at times because of lack of congruence in their respective short-term and strategic interests

Consequently, those who cavil that in choosing a European aircraft over an American one, India has bought a plane but not a relationship are engaging in sophistry. Firstly, this is gratuitously slighting the Europeans. Furthermore, if the large signed or about to be signed contracts with the Americans are insufficient to buy a relationship, what is the guarantee the MMRCA deal would have satisfied the US appetite? Wisely, after the initial flush of disappointment, the Americans have corrected their stance by rightly stating that the India-US relationship does not depend on the outcome of a single deal, and that US companies will continue to look for opportunities in India’s defence sector. The US should look for a bigger share of India’s defence pie, which it will get, but not feel entitled to have most of it.

We are so proud of the techies in our little Silicon Valleys (Bangalore, Hyderabad) that we mistakenly believe that the nerve-centre of US economy is now in India and the Americans can’t do anything until a guy sitting somewhere in India presses a button.

No doubt, thousands of young Indians (with fake names and fake accents) every day tell hundreds of thousands of Americans how to make their credit card payments or how to use a toilet cleaner, but to assume that we run America is preposterous. The fact is that our economy is dependent on American companies which outsource their work to us (at the cost of poor Americans). If the Americans stop hiring our cheap labour, it’s India that will get hit, not the Americans. Every time an American leader talks against outsourcing, India’s BPO bosses begin to shiver with fear.

But, this outsourcing business is not one way. The Americans might be using us for running their software labs, kitchens, clinics and grocery stores, but we have outsourced our foreign policy to Washington. It’s no longer the purpose of Indian foreign policy to protect India’s interest, its objective is to protect and serve American interest. Our foreign policy mandarins no longer use their brains, they look at Washington for inspiration, guidance and orders.

A very good example of this complete sell-out was seen last week, when India failed to send a representative to an international summit on terrorism in Tehran. Though Iranian President Mahmoud Ahmadinejad sent an invitation to Indian vice-president, the government not only ruled out Hamid Ansari’s participation in the meeting but it also failed to name a replacement. (In recent years, Iran has invited Prime Minister Manmohan Singh at least twice and he hasn’t responded at all). As a result, there was no Indian participation in an important regional meeting on a crucial issue like terrorism. No points for guessing why the Indian government, whose ministers see a terror threat everywhere, declined the Iranian invitation. Obviously, it was done under American pressure. New Delhi doesn’t want to be seen having friendly relations with a country which is at loggerheads with US. It’s difficult to say if India chickened out after someone from Washington called someone in Delhi, but Indian leaders know very well what makes the Americans happy or what irritates them. So, to make their masters in Washington happy, India’s foreign ministry decided to annoy the Iranians.

India was not the only country under pressure to give the meeting a miss, the governments of Pakistan and Afghanistan too were being pressured – both by US and Saudi Arabia – to decline the Iranian invite. But not only Afghan President Hamid Karzai and Pakistani President Asif Ali Zardari attended the summit, they also had a tripartite meeting with Iran, underlining the “necessity for further cooperation among the regional and the neighboring countries”. They pledged to expand their “cooperation in political, security, economic and cultural areas, as well as fighting terrorism and foreign interventions”.

In a brutally frank statement Karzai emphasized Iran's role in creating peace and stability in the region, saying “The Afghan nation demand for withdrawal of foreign forces from their country, in this situation Iran and Pakistan can have an important role in establishing peace in Afghanistan.” And Zardari said that the relations between Iran and Pakistan are supported by a firm cultural and historical background. "These relations will have a far brighter future," he said.

What does this mean for India? It means India has become a non-player in Afghanistan and it has pushed Iran towards Pakistan. In the past 10 years, India has spent millions of dollars in Afghanistan with the objective of curtailing Pakistan’s influence in the country. Now, it’s very clear from Karzai’s statement that India has no role in Afghanistan at all. Why? Blind followers of US foreign policy, Indian ministers and diplomats have been speaking the American lingo on Afghanistan and playing silly side-kick to the American big brother. Now, as Americans are planning to pull out of Afghanistan while striking a deal with Taliban, India stands lost and confused. All the regional countries – Iran, Pakistan, Tajikistan – and the US are in the picture but India is out, looking like a non-state actor.

By aligning our foreign policy with American interest, India is now on the verge of losing old friends and making new enemies. Our friendship and cultural relations with Iran go back to centuries, but we now have begun to believe western propaganda about Iran. Even ordinary Indians tend to believe that Iran is some kind of medieval black hole run by a clutch of evil minds. I was in Tehran in June 2008, when the country was preparing to vote for its presidential election, and I saw how democracy works in that country. There were TV debates between the four presidential candidates; young boys and girls campaigned on the streets late at night; different groups organized political rallies every day; and the polling was as free and fare as possible. But, following some disturbances in Tehran, the western media went to paint the entire Iranian system as illegitimate even as western governments continued to support corrupt, medieval and illegal governments in the Arab world – from Morocco to Egypt to Saudi Arabia to Bahrain.

The fact is that Iran has been the only functioning democracy in the entire Middle Eastern region. And it’s the only country which refuses to hand over its resources (oil and gas) to greedy American companies. That explains American hatred towards Iran. That explains the US plans to destroy Iran’s oil industry. Under US pressure, India hasn’t paid Iran any money for the oil bought from that country. India owns $5 billion to Iran. The oil is coming every day but India is not showing any interest in paying Iran. This despite the fact that there is no UN sanctions against Iran’s oil industry. China and European countries are buying oil from Iran but India is proving its loyalty to America by inventing new excuses every day.

This government wants to make India a client state of United States. The way it’s functioning, its dream of being an American lackey may succeed one day, but it will come at a very heavy cost of losing real and trusted friends in our immediate neighbourhood.

June 29, 2011

We tend to have an over-fascination for nuts and bolts and an allergy for concepts. The reports of such reviews ultimately turn outto be a plethora of nuts and bolts recommendations without a proper conceptual framework which could sustain our national security management system in the coming 10 years, if not longer.We should avoid this in carrying forward this important exercise.

Since India became independent in 1947, it has had four in-house and one inter-ministerial reviews on certain aspects of national security management.

2. The in-house reviews went into the deficiencies in national security management as noticed during the Sino-Indian war of 1962, the Indo-Pakistan war of 1965, the Mizo uprising of 1966 and the 26/11 terrorist strikes in Mumbai. The inter-ministerial review by the Kargil Review Committee (KRC)headed by the late K.Subramanyam in 1999 went into the operational deficiencies noticed during the Kargil military conflict in 1999.

3. Of the five reviews held since 1947, three were totally Pakistan-centric, one of 1962 was China-centric and one was terrorism-related. All the previous reviews were the result of perceptions of failures in national security management which led to specific situations having a detrimental impact on national security.

4. All of them were essentially post-mortems with restricted terms of reference. They did bring about significant modifications or additions to the national security architecture--- such as the creation of the Directorate-General of Security after the 1962 war to enhance our capabilities vis-à-vis China, the creation of the Research & Analysis Wing (R&AW) after the 1965 war with Pakistan and the Mizo uprising, the creation of theNational Security Council and its Secretariat, the Defence Intelligence Agency and the NationalTechnical Research Organisation (NTRO) after the Kargil conflict and the National Investigation Agency and the proposed national intelligence grid after the 26/11 terrorist strikes.

5.All the major recommendations which came out of these previous reviews were implemented except one relating to the creation of the Chief of the Defence Staff system, which was not implemented reportedly due to differences amongst the three wings of the Armed Forces over the need for it.

6. Thus, the previous reviews did make significant contributions to a revamping of our national security architecture.However, since the previous reviews were triggered by perceptions of specific failures or deficiencies, they focussed on identifying the reasons for those failures and deficiencies and making necessary changes to prevent a repetition of those failures or deficiencies.

7. Since independence, there has never been a comprehensive, proactive strategic review of our national security management system, which will be futuristic and all-encompassing and not a panic reaction to past failures. Such a futuristic review has to project over different time-frames the threats to national security that could be expected in the future in the short, medium and long-terms, examine whether we have the required capabilities to be able to meet those threats, Identify existing deficiencies in capabilities, recommend action to remove them and suggest a time-frame for removing them.

8. Any futuristic exercise has to go beyond classical or conventional perceptions of national security management and the national security architecture. Its objective should be not only to enable us anticipate and meet future threats, but also to make a benign projection of our power abroad. National security management under the new context of India’s expected emergence as a major power of the region and ultimately of the world would involve identificationofnot only likely threats to our national security in the classical sense, but also likely hindrances to our emergence as a major power and recommendingaction to prevent or remove those hindrances.

9. The Government of Prime Minister Dr.Manmohan Singh needs to be complimented for setting up a National Task Force headed by ShriNaresh Chandra to make a futuristic review of our national security management system and come out with appropriate recommendations. The Task Force, as constituted, has eminent persons who had occupied senior positions in the Armed Forces, the Intelligence Community and the Atomic Energy Commission, and also non-governmental experts.

10. ShriNaresh Chandra’s credentials for heading such a futuristic exercise are immense. He had served as the Home Secretary and the Defence Secretary and ultimately retired as the Cabinet Secretary of the Government of India. He is thus familiar with the working of the Armed Forces and the intelligence community. He had served as the Indian Ambassador to the US at a difficult time and is thus not a stranger to the world of big power diplomacy.He had served and continues to serve in the National Security Advisory Board (NSAB) and was its convenor for some time. He is thus familiar with the deficiencies which have crept into the working of our national security management system since the Kargil review of 1999.

11. How useful is thefuturistic exercise being attempted for the first time since 1947 would depend on the constitution of the Task Force, its Terms of Reference, its methods of work and concepts, and the co-operation that it is able to get from the serving national security managers of today. Unless one is able to convince the serving officers of today of the need for changes, reforms, new thinkingand new concepts and ideas, even the best of Task Forces would fail to meet the objectives for which it was set up.

12. It is to be hoped that the Government would have carefully worked out the terms of reference of the Task Force. Its organisation, methods and concepts have to be decided by the Task Force itself. The Government would have and should have no role in the matter. The Task Force should devote the first month of its existence to a brain-storming with different sections of our national security management world in order to get its ideas and concepts right before plunging into the nuts and bolts of the exercise.

13. We tend to have an over-fascination for nuts and bolts and an allergy for concepts. The reports of such reviews ultimately turn outto be a plethora of nuts and bolts recommendations without a proper conceptual framework which could sustain our national security management system in the coming 10 years, if not longer.We should avoid this in carrying forward this important exercise.(30-6-11)

BY FISSILE MATERIALS WORKING GROUP | 28 JUNE 2011http://www.thebulletin.org/web-edition/columnists/fissile-materials-working-group/nuclear-materials-security-cooperation-key

As South Korea prepares for the second Nuclear Security Summit, scheduled to take place in Seoul next March, the momentum for collective international action on nuclear terrorism must be sustained. In the months before the 2012 talks, states will have to work together to retain focus on the summit's ultimate goal -- securing vulnerable nuclear material worldwide -- or else risk taking a step backward in the fight against the menace of nuclear terrorism.

Protect the gains made so far. The April 2010 Nuclear Security Summit in Washington, DC, created a tremendous opportunity to reshape global perspectives on nuclear terrorism. For the first time, the idea of fighting nuclear terrorism emerged on the collective international agenda, rather than on the discrete agendas of individual nations. Before the 2010 summit, the topic of nuclear terrorism had been confined, politically, to national governments and, intellectually, to a few Western think tanks, university departments, and nongovernmental organizations. In organizations outside the West, nuclear terrorism was even considered a marginal or remote issue -- despite the growing threat of terrorist networks with international reach, such as the Taliban or Al Qaeda.

The 2010 summit in Washington seemed to change that attitude. Among other steps taken at the meeting, four states -- India, China, Japan PDF, and Italy -- announced plans to establish nuclear security centers to promote global nuclear security; today, each state has begun to operate these centers. In India, for example, the objective of the new School of Nuclear Security Studies at the Global Centre for Nuclear Energy Partnership is to introduce security forces from around the world to physical-protection systems and response procedures using advanced technologies, such as sensors and seismic monitoring; the school offers courses on physical security, personnel reliability, materials control, and accounting. India also signed a memorandum of understanding with Japan and the United States agreeing to share best practices for the security of nuclear material and facilities; These countries will each work to develop nuclear security training curricula and programs for the global nuclear industry, nuclear scientists, and the security forces protecting nuclear facilities.

Signs of trouble? Despite the many positive developments made as a result of the April 2010 summit, states' dedication to collaborative international action on nuclear security is anything but certain. In fact, within months of the summit, the apparent trend toward collective action seemed to be in danger. When representatives from the 47 states that participated in the first Nuclear Security Summit gathered in Buenos Aires in November 2010 to review the national commitments made in April, the meeting seemed to lose sight of the overarching goal, devolving into disagreements. The spirit of consensus-building that had prevailed in April gave way to confrontation, and the meeting of nuclear security "sherpas" (diplomats who represent their governments at conferences) was unsuccessful. Partly responsible for this were the long-standing differences in interests between the Non-Aligned Movement and Western states; this fracture, which commonly emerges at international negotiations, led to the creation of factions that pushed their own agendas at the Buenos Aires meeting.

For example, one of the contentious proposals, championed by Australia and other countries, was the establishment of a monitoring system -- based on the work plan and communiqué agreed to at the Washington summit -- that would evaluate the progress states have made in implementing their agreed-upon commitments. Several states opposed the idea, while Jordan proposed a different set of monitoring criteria altogether.

Stay focused on international collaboration. The proposed monitoring system, though in line with the Washington summit's main principle of states agreeing to national implementation of nuclear security mechanisms on a voluntary basis, appeared to some nations to challenge their sovereignty. In Buenos Aires, many representatives asked where national jurisdiction would end and international jurisdiction would begin. For some states, this brought to light a serious concern that could undermine the success of future summits if it remains unaddressed: that the Nuclear Security Summit was making an unwelcome transition toward law enforcement.

Furthermore, some of the proposals made at the Buenos Aires meeting of sherpas seemed to marginalize the importance of the International Atomic Energy Agency (IAEA) and its role in global nuclear security. In fact, the centrality of the IAEA to future joint efforts to strengthen nuclear security had been agreed on, even before the April 2010 summit. Hopefully, in the future, IAEA's centrality will remain undisturbed.

At least two more sherpa meetings are planned to take place before the 2012 Seoul summit. These meetings must harness the goodwill generated by the Washington summit and soothe the concerns that emerged in Buenos Aires. The sherpa meetings (and the Seoul summit itself) need to work to clarify the international collaborative element and to reinforce the goal of securing vulnerable nuclear materials. The meetings should focus on nuclear security in the wake of Fukushima. The synergy of safety and security must be included in the 2012 agenda.

Now that the fight against nuclear terrorism has gained a spot on the collective international agenda, we must work to keep it there. We cannot afford to allow divisive issues to dilute the main principles of the summit process. A repetition of the failed Buenos Aires meeting would slow the passage of an effective nuclear security and counterterrorism regime that the world badly needs. The Seoul Nuclear Security Summit will provide the chance for countries to band together to fight nuclear terrorism. In the final analysis, this is an opportunity that cannot be squandered.

Editor's Note: This column was written by Rajiv Nayan, international partner of the Fissile Materials Working Group and a senior research associate at the Institute for Defence Studies and Analyses in New Delhi

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